Our common stock is quoted on OTC Markets under the symbol “IONI”. The liquidity of our common stock is very limited and is affected by our limited trading market. The OTC Markets is an
inter-dealer market much less regulated than the major exchanges, and is subject to abuses, volatilities and shorting. There is currently no broadly followed and established trading market for our common stock. An established trading market may
never develop or be maintained. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. Absence of an active trading market reduces the liquidity of the shares traded.
The trading volume of our common stock may be limited and sporadic. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively
unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they may tend to be risk-averse and would
be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading
activity in our shares is minimal, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give any assurance that a
broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained. As a result of such trading activity, the quoted price for our common stock while on the OTC Markets
may not necessarily be a reliable indicator of its fair market value.
Because we became public by means of a “reverse business combination,” we may not be able to attract the attention of major brokerage firms.
There may be risks associated with us becoming public through a “reverse business combination.” Securities analysts of major brokerage firms and securities institutions may not provide coverage
of us because there were no broker-dealers who sold our stock in a public offering that would be incentivized to follow or recommend the purchase of our common stock. The absence of such research coverage could limit investor interest in our
common stock, resulting in decreased liquidity. No assurance can be given that established brokerage firms will, in the future, want to cover our securities or conduct any secondary offerings or other financings on our behalf.
The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the
following:
Many of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance. We cannot make any predictions or projections as to
what the prevailing market price for our common stock will be at any time, including as to whether our common stock will sustain current market prices, or as to what effect that the sale of shares or the availability of common stock for sale at
any time will have on the prevailing market price.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These
market fluctuations may also materially and adversely affect the market price of our common stock.
The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating
results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting the Company’s competitors or the Company itself.
A decline in the price of our common stock could affect our ability to raise working capital and adversely impact our ability to continue operations.
A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. A decline in the price of
our common stock could be especially detrimental to our liquidity, our operations and strategic plans. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and
operations, including our ability to develop new services and continue our current operations. If our common stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations
sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.
Concentrated ownership of our common stock creates a risk of sudden changes in our common stock price.
The sale by any shareholder of a significant portion of their holdings could have a material adverse effect on the market price of our common stock.
Sales of our currently issued and outstanding stock may become freely tradable pursuant to Rule 144 and may dilute the market for your shares and have a depressive effect on
the price of the shares of our common stock.
A substantial majority of the outstanding shares of Common Stock are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”)
(“Rule 144”). As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required
under applicable state securities laws. Rule 144 provides in essence that a non-affiliate who has held restricted securities for a period of at least six months may sell their shares of common stock. Under Rule 144, affiliates who have held
restricted securities for a period of at least six months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1% of a company’s outstanding shares of common
stock or the average weekly trading volume during the four calendar weeks prior to the sale. A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares of
common stock, may have a depressive effect upon the price of our shares of common stock in any active market that may develop.
We do not plan to declare or pay any dividends to our stockholders in the near future.
We have not declared any dividends in the past, and we do not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the
discretion of the board of directors and will depend upon, among other things, the results of operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant.
There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
The requirements of being a public company may strain our resources and distract management.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
Act”), and the Securities Act. These rules, regulations and requirements are extensive. We may incur significant costs associated with our public company corporate governance and reporting requirements. This may divert management’s attention
from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. We also expect that these applicable rules and regulations may make it more difficult and more expensive for
us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified individuals to serve on our board of directors or as executive officers.
Future changes in financial accounting standards or practices may cause adverse unexpected financial reporting fluctuations and affect reported results of operations.
A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective.
New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial
results or the way we conduct business.
Trading in our common stock has previously been subject to the “penny stock” rules. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer that recommends our common stock to persons other than prior customers and accredited investors, must, prior to the sale, make a special
written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our common stock, which could severely limit
the market price and liquidity of our common stock.
SHOULD ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED
PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock first became quoted on the OTC Markets under the trading symbol “EVBW” on March 27, 2014. On February 24, 2016, our common stock began trading under the name Evans Brewing
Company, Inc. and under the trading symbol “ALES”. On April 21, 2016, the common stock was uplisted to the OTCQB Venture Marketplace and on August 2, 2018 our trading symbol was changed to IONI. Over the counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. The following table lists the high and low sale information for our common stock as quoted on the OTC Markets for the
fiscal years ended 2019 and 2018:
The above quotations from the OTC Markets reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
(b) Holders
The number of record holders of our common stock as of December 31, 2019, was approximately 70 based on information received from our transfer agent. This amount excludes an indeterminate number
of shareholders whose shares are held in “street” or “nominee” name with a brokerage firm or other fiduciary.
(c) Dividends
We have not paid or declared any cash dividends on our common stock and we do not anticipate paying dividends on our common stock for the foreseeable future.
DESCRIPTION OF SECURITIES
General
The Company’s authorized capital stock consists of 110,000,000 shares of capital stock, par value $0.0001 per share, of which 100,000,000 shares are common stock, par value $0.0001 per share and
10,000,000 shares are “blank check” preferred stock, par value $0.0001 per share.
Common Stock
Holders of Company’s common stock are entitled to one vote per share on each matter submitted to vote at a meeting of Company’s stockholders. Holders of common stock do not have cumulative voting
rights. Stockholders do not have any preemptive rights or other similar rights to acquire additional shares of Company’s common stock or other securities. Subject to preferences that may be applicable to any then-outstanding preferred stock,
holders of common stock are entitled to share in all dividends that the board of directors, in its discretion, declares from legally available funds. In the event of liquidation, dissolution or winding up, subject to preferences that may be
applicable to any then-outstanding preferred stock, each outstanding share of common stock entitles its holder to participate ratably in all remaining assets of the Company that are available for distribution to stockholders after providing for
each class of stock, if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. The rights of the
holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is authorized and issued.
Preferred Stock
The Company’s Certificate of Incorporation authorizes the issuance of 10,000,000 shares of “Blank Check” Preferred Stock, par value $0.0001 per share, subject to any limitations prescribed by
law, without further vote or action by the stockholders, to issue from time to time shares of preferred stock in one or more series. Each such series of Preferred Stock shall have such number of shares, designations, preferences, voting powers,
qualifications, and special or relative rights or privileges as shall be determined by the Company’s board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive
rights. There are no shares of Preferred Stock outstanding.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company’s Certificate of Incorporation and By-laws provide, to the fullest extent permitted by Delaware law, that the officers and directors of the Company who was or is a party to or is
threatened to be made a party to, any threatened, or pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative, by reason of fact that he/she is or was acting as the incorporator, officer, director
or nominee officer/director or was serving in any capacity at any time. Furthermore, it is the responsibility of the Company to pay for all legal expenses that may occur on behalf of the party who may come under any such type of action.
Delaware General Corporation Law (“GCL”) Section 145 provides the Company with the power to indemnify any of our directors and officers. The director or officer must have conducted
himself/herself in good faith and reasonably believe that his/her conduct was in, or not opposed to our best interests. In a criminal action, the director, officer, employee or agent must not have had reasonable cause to believe his/her conduct
was unlawful.
Under GCL Section 145, advances for expenses may be made by agreement if the director or officer affirms in writing that he/she believes he/she has met the standards and will personally repay the
expenses if it is determined such officer or director did not meet the standards.
Pursuant to the Company’s Certificate of Incorporation and By-laws, we may indemnify an officer or director who is made a party to any proceeding, because of his position as such, to the fullest
extent authorized by GCL, as the same exists or may hereafter be amended. In certain cases, we may advance expenses incurred in defending any such proceeding.
To the extent that indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling our company pursuant to the foregoing
provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. If a claim for indemnification against such liabilities (other
than the payment by us of expenses incurred or paid by a director, officer or controlling person of our company in the successful defense of any action, suit or proceeding) is asserted by any of our directors, officers or controlling persons in
connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by the final adjudication of that issue.
Anti-Takeover Effects of Provisions of Delaware State Law
We may be or in the future we may become subject to Delaware’s control share law. We are subject to Section 203 of the Delaware General Corporation Law. This provision generally prohibits a
Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date the stockholder became an interested stockholder, unless:
● prior to such date, the Board of Directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;
● upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
● on or subsequent to such date, the business combination is approved by the Board of Directors and authorized at an annual meeting or special meeting of stockholders and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines a business combination to include:
● any merger or consolidation involving the corporation and the interested stockholder;
● any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
● subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;
● any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder;
or
● the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.
In general, Section 203 defines an “interested stockholder” as any entity or person beneficially owning 15% or more of the outstanding voting stock of a corporation, or an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding voting stock of a corporation at any time within three years prior to the time of determination of interested stockholder status; and any entity or person
affiliated with or controlling or controlled by such entity or person.
Anti-Takeover Charter Provisions
Our Certificate of Incorporation and Bylaws contain provisions that could have the effect of discouraging potential acquisition proposals or tender offers or delaying or preventing a change in control of our
company, including changes a stockholder might consider favorable. In particular, our Certificate of Incorporation and Bylaws, as applicable, among other things, will:
● provide our Board of Directors with the ability to alter our Bylaws without stockholder approval;
● provide for an advance notice procedure with regard to the nomination of candidates for election as directors and with regard to business to be brought before a meeting of stockholders; and
● provide that vacancies on our Board of Directors may be filled by a majority of directors in office, although less than a quorum.
Such provisions may have the effect of discouraging a third-party from acquiring our company, even if doing so would be beneficial to its stockholders. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of our Board of Directors and in the policies formulated by them, and to discourage some types of transactions that may involve an actual or threatened change in control of our company. These
provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage some tactics that may be used in proxy fights. We believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an
improvement of their terms.
However, these provisions could have the effect of discouraging others from making tender offers for our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect
of preventing changes in our management.
A corporation is subject to Delaware’s control share law if it has more than 200 stockholders, at least 100 of whom are stockholders of record and residents of Delaware, and if the corporation
does business in Delaware or through an affiliated corporation.
The law focuses on the acquisition of a “controlling interest” which means the ownership of outstanding voting shares is sufficient, but for the control share law, to enable the acquiring person
to exercise the following proportions of the voting power of the corporation in the election of directors: (1) one-fifth or more but less than one-third, (2) one-third or more but less than a majority, or (3) a majority or more. The ability to
exercise such voting power may be direct or indirect, as well as individual or in association with others.
The effect of the control share law is that the acquiring person, and those acting in association with that person, obtain only such voting rights in the control shares as are conferred by a
resolution of the stockholders of the corporation, approved at a special or annual meeting of stockholders. The control share law contemplates that voting rights will be considered only once by the other stockholders. Thus, there is no authority
to take away voting rights from the control shares of an acquiring person once those rights have been approved. If the stockholders do not grant voting rights to the control shares acquired by an acquiring person, those shares do not become
permanent non-voting shares. The acquiring person is free to sell its shares to others. If the buyers of those shares themselves do not acquire a controlling interest, their shares do not become governed by the control share law.
If control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of the voting power, any stockholder of record, other than an
acquiring person, who has not voted in favor of approval of voting rights, is entitled to demand fair value for such stockholder’s shares.
Delaware’s control share law may have the effect of discouraging corporate takeovers.
In addition to the control share law, Delaware has a business combination law, which prohibits certain business combinations between Delaware corporations and “interested stockholders” for three
years after the “interested stockholder” first becomes an “interested stockholder” unless the corporation’s board of directors approves the combination in advance. For purposes of Delaware law, an “interested stockholder” is any person who is (1)
the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation, or (2) an affiliate or associate of the corporation and at any time within the three previous years was
the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition of the term “business combination” is sufficiently broad to cover virtually any kind of
transaction that would allow a potential acquirer to use the corporation’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders.
The effect of Delaware’s business combination law is to potentially discourage parties interested in taking control of the Company from doing so if it cannot obtain the approval of our Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
On August 22, 2018, we entered into an equity purchase agreement (the “Purchase Agreement”) with Peak One Opportunity Fund, L.P. (“Buyer”), whereby Buyer agreed to invest up to $540,000.00 (the “Purchase Price”)
in our Company in exchange for convertible debentures, upon the terms and subject to the conditions thereof. Pursuant to the SPA, we issued a convertible debenture to the Buyer in the original principal amount of $200,000.00 (the “Signing
Debenture”). Each convertible debenture issued pursuant to the SPA, coupled with the accrued and unpaid interest relating to each convertible debenture, is due and payable three years from the issuance date of the respective convertible
debenture. Any amount of principal or interest that is due under each convertible debenture, which is not paid by the respective maturity date, will bear interest at the rate of 18% per annum until it is satisfied in full. Additionally, the
Buyer has the right at any time to convert amounts owed under each convertible debenture into shares of our common stock. Each debenture shall contain representations, warranties, events of default, beneficial ownership limitations, and other
provisions that are customary of similar instruments. As consideration for the Purchase Agreement we issued the Buyer warrants to purchase 50,000 shares of Common Stock at the exercise price of $2.75 expiring five years after issuance (the
“Warrants”).
Pursuant to the Agreement of Merger and Plan of Reorganization (the “Merger Agreement”) with I-ON Acquisition Corp., a wholly-owned subsidiary of the Registrant, and I-ON Digital, Corp.., a company organized under
the laws of the Republic of Korea (South Korea) (“I-ON”) the Company issued the shareholders of I-ON (the “I-ON Holders”) an aggregate of 26,000,000 shares of our Common Stock (the “Merger Shares”) in accordance with the pro rata ownership of the
I-ON Holders immediately prior to the Merger.
All of the securities referred to above were offered and sold without registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of
the Securities Act as provided in Rule 506(b) of Regulation D and/or Regulations promulgated thereunder. The securities have not been registered under the Securities Act or any other applicable securities laws, and unless so registered, may not
be offered or sold in the United States except pursuant to an exemption from the registration requirements of the Securities Act
ITEM 6: SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by 17 C.F.R. 229(10)(f)(i) and are not required to provide the information under this heading.
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information contained in the consolidated financial statements of the Company and the notes thereto appearing elsewhere herein and in conjunction
with the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Readers should carefully review the risk factors
disclosed in this Form 10-K and other documents filed by the Company with the SEC.
As used in this report, the terms “Company”, “we”, “our”, and “us” refer to I-ON Digital Corp., a Delaware corporation.
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements can be identified by the use of words such as
“believes,” “estimates,” “intends”, “plans”, “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should,” “designed to,” “designed for,” or other variations or similar words or language. The forward-looking
statements are based on the current expectations of the Company and are subject to certain risks, uncertainties and assumptions, including those set forth in the discussion under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in this report. Actual results may differ materially from results anticipated in these forward-looking statements. We base the forward-looking statements on information currently available to us, and we assume no
obligation to update them
Business History of Company
I-ON Digital Corp. (the “Company”) was incorporated under the laws of the State of Delaware on June 18, 2013. On April 4, 2014, The Michael J. Rapport Trust (the “Trust”) purchased 10,000,000
shares of the Company’s common stock which was all of the outstanding shares of Alpine 3, Inc., and subsequently changed the name to Evans Brewing Company Inc. (“EBC”) on May 29, 2014. On October 9, 2014, the Trust agreed to the cancellation of
9,600,000 of the shares of common stock that it had acquired and retained 400,000 shares of common stock. From April 2014 through December 2015, EBC has been in the process of acquiring the Bayhawk brands and related assets, as discussed in
more detail below.
On October 15, 2014, EBC entered into an Asset Purchase and Share Exchange Agreement (the “Agreement”), with Bayhawk Ales, Inc. (“Bayhawk”) whereby Bayhawk sold to EBC, and EBC purchased from
Bayhawk, assets of Bayhawk, in exchange for 4,033,863 shares of EBC common stock upon the terms and subject to the conditions set forth in the Asset Purchase and Share Exchange Agreement.
On September 29, 2016, Evans Brewing Company, Inc., closed the acquisition of a restaurant business located in the downtown SOCO District of Fullerton, California, through the acquisition of
all the outstanding stock of EBC Public House, Inc., which the Company now operates as its first branded restaurant and taproom under the trade name “The Public House by Evans Brewing Company”. The Public House features the Company’s beers – as
well as beers from other selected local Orange County, California breweries, -- food and, occasional entertainment. In connection with such closing, the Company acquired 100% of the outstanding shares of EBC Public House from Mr. Rapport and
issued 1,000,000 shares of the Company’s Series A Preferred Stock to Mr. Rapport. The asset purchase and share exchange have been treated as business combination as both companies are controlled by the same management.
On January 25, 2018, the Company consummated an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”), with I-ON Digital Corp.., a
company organized under the laws of the Republic of Korea (South Korea) (“I-ON”) and I-ON Acquisition Corp., a wholly-owned subsidiary of the Registrant (“Acquisition”). Pursuant to the terms of the Merger Agreement, Acquisition merged with
and into I-ON in a statutory reverse triangular merger (the “Merger”) with I-ON surviving as a wholly-owned subsidiary of the Registrant. As consideration for the Merger, the Registrant agreed to issue the shareholders of I-ON (the “I-ON
Holders”) an aggregate of 26,000,000 shares of our Common Stock. Following the Merger, the Registrant adopted the business plan of I-ON in information technology consultancy and software development. On December 14, 2017, in connection with
the Merger, the Registrant’s Board of Directors approved an amendment to its Certificate of Incorporation (the “Amendment”) to change its name to I-ON Digital Corp. On April 2, 2019, the Company amended its Certificate of Incorporation to
change the name of the Company to “I-ON Digital Corp.”
Prior to the Merger, the Company operated a craft brewery based on Orange County, California that produces and sells premium craft beers, including a variety of ales and lagers. EBC’s beers are
currently produced in its 17-barrel brewery in Irvine, California, the oldest continuously operating brewing facility in Orange County and one of the oldest in all of Southern California. This facility has been producing craft beers since
January 1995.
Following the Merger, the Company adopted the business plan of I-ON. I-ON was founded by Jae Cheol James Oh, who currently serves as CEO, the
Company’s roots of which are in IT consultancy and software development. I-ON services South Korea’s Enterprise Content Management system’s market and specializes in advancing market-leading internet software applications to capitalize on
rapidly growing market sectors.
After being awarded its first of 6 patents in 2003, I-ON has since evolved into an industry-leading and recognized software developer and provider of enterprise-class unstructured data
management and digital marketing software and solutions. I-ON services over 1,000 blue-chip and middle-market clients across virtually all verticals in both private and public sectors. The Company has meaningfully expanded its reach over
the past decade and now currently licenses and sells its products and services directly to clients in South Korea and Japan, as well as in Singapore, Malaysia, Indonesia, Thailand, Vietnam, and the U.S. through value-added resellers and
partnerships.
I-ON’s portfolio of software and solutions serves the digital marketing and technology needs of organizations, enabling clients to create, measure, and optimizes digital experiences for their
audiences across marketing channels and devices. We believe these solutions help clients reduce the cost of content management and delivery and increase the return on their investments in digital communication.
ON currently holds 6 international patents for both products and methodologies (with 3 more pending) built into the 11 product offerings the Company currently has at market. These encompass
enterprise web content management (CMS), web experience and service delivery software, digital marketing, smart mobility and analytics tools, and, more recently, energy management solutions. The Company has designed and developed
industry-leading technologies that are compliant with global standards including GS (Good Software) and NET (New Excellent Technology). I-ON also holds numerous domestic and global industry awards, earning high rankings and recognition from
the likes of Gartner (Magic Quadrant 2014) and Red Herring (2014 Asia Top 100 Winner), among many others.
The financial statements of the Company are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States.
Summary of Significant Accounting Policies
Our significant accounting policies are more fully described in the notes to our consolidated financial statements included in this Annual Report on Form 10-K for the fiscal year ended December
31, 2019. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations.
Results of Operations for the year ended December 31, 2019 as Compared to the year ended December 31, 2018
Net sales increased by $862,368 or 12.2%, to $7,954,015 for the year ended December 31, 2019 from $7,091,647 for the year ended December 31, 2018. The net increase in net sales was primarily due
the following:
Cost of goods sold increased by $260,532 or 5.0%, to $5,519,931 for the year ended December 31, 2019 from $5,259,399 for the year ended December 31, 2018. The increase was primarily due to
increase in outside services (outsourced developers) due to increase in revenue.
Gross profit increased by $601,836, or 32.8%, to gross profit of $2,434,084, or 30.6% of net sales, for the year ended December 31, 2019, from gross profit of $1,832,248, or 25.8% of net sales,
for the year ended December 31, 2018. The gross profit increase was mainly due to increase in sales of 12.2% in year 2019 compared to year 2018. While outside services (outsourced developers) costs increased in year 2019 compared to year
2018, salaries maintained same in year 2019 compared to year 2018, which resulted in higher gross margin.
Research and development expenses increased by $508,871 or 154.5%, to $838,237 for the year ended December 31, 2019 from $329,366 for the year ended December 31, 2018. The increase was due to
increase in head count.
General and Administrative
General and administrative expenses decreased by $63,081 or -3.3%, to $1,871,818 for the year ended December 31, 2019 from $1,934,899 for the year ended December 31, 2018, maintaining same
expenses as prior year.
Other income (expense) for the year ended December 31, 2019, was ($155,480) compared to $124,443 for the year ended December 31, 2018. The change was primarily a result of loss on extinguishment of convertible
debt. Income (loss) before provision for income taxes, loss on equity investments in affiliates and non-controlling interest for the year ended December 31, 2019 was ($431,451) compared to ($307,574) for the same period in 2018.
Change in tax provision increased by $699,108 or -165.2%, to $276,015 for the year ended December 31, 2019 from tax benefit of $423,093 for the year ended December 31, 2018.
Net Income (Loss)
Net income (loss) from operations for the year ended December 31, 2019, was ($712,448) compared to $81,837, for the year ended December 31, 2018. Our increase in net income from operations can primarily be
attributed to an increase in our benefit from income tax, which was $276,015 for the year ended December 31, 2019, as compared to a provision for income tax of $423,093 for the year ended December 31, 2018, and an increase in our total other
expense, which was $155,480 for the year ended December 31, 2019, as compared to total other income of $124,443 for the year ended December 31, 2018.
Liquidity and Capital Resources
At December 31, 2019, the Company had cash and cash equivalents of $1,337,741. We estimate that we will require up to $3,000,000 of capital for the next year of operations. We estimate that our
expenses will be comprised primarily of general expenses including particularly marketing, research and development costs, overhead, legal and accounting fees.
Operating Activities. Operating cash flows for the fiscal 2019 and 2018 were a positive $134,444 and a positive $146,880,
respectively. The less increased cash flow from operating activities for the fiscal 2019 compared to the same period last year primarily reflects increased net loss.
Investing Activities. Net cash flows of investing activities for the fiscal 2019 and 2018 was negative $462,131 and a negative
$162,680, respectively. Capital expenditures represented most of the cash used in investing activities flows for the fiscal 2019. The increase payable in short-term loans represented most of the cash provided by investing activities flows for
fiscal 2018.
Financing Activities. Financing cash flows for the fiscal 2019 and 2018 were a positive $57,296 and a positive $353,923, respectively.
For the fiscal 2019, net cash was provided primarily by proceeds from issuance of preferred share. For the fiscal 2018, net cash was provided primarily from increased borrowings under short term loan payable and long term loan payable, which
was partially offset by treasury stock purchase.
Off Balance Sheet Arrangements
As of December 31, 2019, there were no off balance sheet arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by 17 C.F.R. 229 (10)(f)(i) and are not required to provide information under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 appears after the signature page to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Report on Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the
issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
An evaluation was conducted under the supervision and with the participation of our management of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2019.
Based on that evaluation, our management concluded that our disclosure controls and procedures were not effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company had no audit committee. Such officer also confirmed that there was no change in our internal control over financial reporting
during the fiscal year period ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. Other Information
None.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
I-ON Digital Corp. (“the Company”) was incorporated on July 5, 1999, and is engaged in developing and supplying computerized system. The corporate headquarter is located at 15 Teheran-ro 10-gil Gangnam-gu Seoul,
South Korea. The Company provides enterprise content management services to customers primarily in Korea, Japan and Indonesia, by developing industry-leading products such as ICS (web content management system), iDrive (e-document management
system), LAMS (load aggregator’s management system), e.Form (mobile contract system), IDAS (digital asset management system) and ICE (content delivery system).
I-ON, Ltd is the Japanese subsidiary of the Company incorporated in 2002. The Company has 99.5% ownership of I-ON, Ltd. PT ION-soft is the Indonesian affiliate of the Company incorporated in October 2011 (20% of
ownership). The Company has changed the ownership of PT I-ON-soft into 0.9%, due to the capital increase of the major shareholder on August 1, 2019.
The summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are
representations of the Company’s management, who is responsible for integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America
and have been consistently applied in the preparation of the consolidated financial statements. The accompanying consolidated financial statements and the notes hereto are reported in US Dollars.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of I-ON Digital Corp. and its 99.5% owned subsidiary, I-ON, Ltd. All intercompany accounts, transactions, and profits have been eliminated upon
consolidation. The accompanying consolidated financial statements and the notes hereto are reported in US Dollars.
The consolidated financial statements were prepared and presented in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. Non-controlling
interests represent the portion of earnings that is not within the parent Company’s control. These amounts are required to be reported as equity instead of as a liability on the consolidated balance sheet. ASC requires net income or loss from
non-controlling interests to be shown separately on the consolidated statements of operations.
The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and
footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations. These
consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2019. The unaudited information contained herein has been prepared on the same basis as the Company’s audited consolidated financial statements, and, in the opinion of the Company’s management, includes all adjustments
(consisting of only normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. The interim results presented herein are not necessarily indicative of the results of operations that may be
expected for the full fiscal year ending December 31, 2020 or any future period.
The Company is also required to consolidate any variable interest entities (VIEs), of which it is the primary beneficiary, as defined. Based on the Company’s analysis pursuant to ASC 810-10-25, Consolidations,
the Company does not have any VIEs that need to be consolidated at this time. When the Company does not have a controlling interest in an entity, but exerts a significant influence over the entity, the Company would apply the equity method of
accounting.
Foreign Currency Transaction and Translation
The Company’s principal country of operations is Korea. The financial position and results of operations of the Company are determined using the local currency, Korean Won (“KRW”), as the functional currency.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
Source (Seoul Money Brokerage Services)
Translation adjustments net of tax were a net loss of $207,767 and net loss of $326,661 for the years ended December 31, 2019 and 2018, respectively.
FASB ASC 280, Segment Reporting, requires public companies to report financial and descriptive information about their reportable operating segments. Operating segments
are defined as components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The
Company’s chief executive officer has been identified as the chief decision maker.
The Company generates revenues from two geographic areas, consisting of Korea and Japan. The following enterprise-wide disclosure is prepared on a basis consistent with the preparation of the consolidated
financial statements:
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
Revenue Recognition
Revenues are recognized when control of the promised services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.
The Company’s revenue consists of services provided and commissions. These revenue sources are as follows:
Investments
The Company classifies its investment securities as available-for-sale securities in accordance with FASB ASC 320, Investments and records these securities at fair value.
Unrealized gains and losses as results of changes in the fair value of the available-for-sale investments are recorded as a separate component within accumulated other comprehensive income in the accompanying balance sheets. At December 31, 2019
and 2018, cost approximates investment value resulting in zero unrealized gain or loss, therefore, the changes in available for sale securities during 2018 and 2017 are the result of the foreign currency translation which is included in the
foreign currency translation and recorded under accumulated other comprehensive income or loss statements.
The Company’s investment securities include privately-held companies where quoted market prices are not available and the cost method, combined with other intrinsic information, is used to assess the fair value of
the investment. If the carrying value is below the fair value of an investment at the end of any period, the investment is considered for impairment. Investments are considered impaired when a decline in fair value is judged to be
other-than-temporary. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded, and a new cost basis in the investment is established.
Cash and Cash Equivalents
The Company considers all money market funds and highly liquid financial instruments with original maturities of three months or less to be cash equivalents.
Restricted Cash
Restricted cash represents cash deposits which is restricted by the financial institutions for the loans the financial institutions having with the Company’s chief executive officer. The loans with the financial
institutions are amounted to approximately $1,502,000 and $1,556,000 at December 31, 2019 and 2018, respectively, and expires on various days during 2019 and 2020, unless extended. The loans, bearing various interest rates, are guaranteed by the
Company and the restricted cash deposits of the Company are provided to the financial institutions as collateral. The Company’s chief executive officer pays interest from the loans without any default at December 31, 2019 and 2018. The amount of
restricted cash as of December 31, 2019 and 2018 was $1,641,043 and $1,699,331, respectively.
This arrangement could be considered as a violation of Section 402 of the Sarbanes-Oxley Act of 2002 amended the Securities Exchange Act of 1934 to prohibit U.S. and foreign companies with securities traded in the
United States from making, or arranging for third parties to make, nearly any type of personal loan to their directors and executive officers. Violations of the Sarbanes-Oxley loan prohibition are subject to the civil and criminal penalties
applicable to violations of the Exchange Act.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
Short-Term Financial Instruments
Short-term financial instruments represent interest-bearing certificates of deposits with original maturities between three months to year.
Accounts Receivable
Accounts receivables are recorded at the invoiced amount and do not bear interest. Amounts collected on accounts receivables are included in net cash provided by operating activities in the consolidated cash flow
statements. The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the trade accounts receivable. Management primarily determines the allowance based on the aging of accounts receivable balances,
historical write-off experience, customer concentrations, customer credit worthiness and current industry and economic trends. The Company’s provision for uncollectible receivables are included in selling, marketing, general and administrative
expense in the consolidated statements of operation and comprehensive loss. At December 31, 2019 and 2018, allowance for doubtful accounts was approximately $674,000 and $725,000, respectively. The Company does not have any off-balance sheet
exposure related to its customers.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and equipment is computed using the declining balance method, based on the estimated useful lives as follows:
Repairs and maintenance are expensed as incurred. Expenditures that increase the value or productive capacity of assets are capitalized. When property and equipment are retired, sold, or otherwise disposed of, the
asset’s carrying amount and related accumulated depreciation are removed from the accounts, and any gain or loss is included in operations.
The Company is working on a government research project and many other technical innovation projects. The Company receives government grants that it uses to offset the amount of assets acquired or expenses
incurred.
Research and development costs are expensed as incurred. Research and development costs include travel, payroll, and other general expenses specific to research and development
activities. Research and development cost for the years ended December 31, 2019 and 2018 were approximately $838,000 and $329,000, respectively.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
Intangible Assets
When the Company acquires an intangible asset, it is recorded at acquisition cost (the purchase price of the intangible asset and the costs directly related to the preparation of the asset for its intended
purpose). The cost of an intangible asset acquired in a business combination is measured at the fair value of the acquisition date according to the accounting standards for business combinations. Other intangible assets with a finite life are
amortized using the straight-line method over their estimated useful lives.
The estimated useful lives of the respective asset categories are as follows:
Severance and Retirement Benefits
In accordance with the Korean Labor Standard Law, employees and directors with at least one year of service are entitled to receive a lump-sum payment upon termination of their employment, based on their length of
service and rate of pay at the time of termination. Accrued severance benefits represent an amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the balance sheet date. The annual
severance benefits expense charged to operations is calculated based upon the net change in the accrued severance benefits payable at the balance sheet date based on the guidance of FASB ASC 960, Accounting –
Defined Benefit Pension Plans.
The Company’s retirement pension plan is a defined contribution plan, and the Company pays the defined contribution regardless of the results of the operation of the plan. The Company recognizes the contributions
to be paid in the current accounting period as retirement benefits expense. The amounts recognized as costs related to defined contribution plans were $353,892 and $421,647 for
the years ended December 31, 2019 and 2018, respectively.
Employees of the Company are entitled to be compensated for absences depending on job classification, length of service, and other factors. At December 31, 2019 and 2018, the amounts were deemed to be immaterial.
Impairment analysis for long-lived assets and intangible assets
The Company’s long-lived assets and other assets (consisting of property and equipment and purchased intangible assets) are reviewed for impairment in accordance with the guidance of the FASB ASC 360, Property, Plant, and Equipment and FASB ASC 205 Presentation of Financial Statements. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected
to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s
estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is
determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. The Company had not experienced impairment losses on its long-lived
assets and intangible assets during any of the periods presented.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
Earnings Per Share
FASB ASC Topic 260, Earnings Per Share, requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations.
Basic earnings (loss) per share are computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic
earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. In
periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Fair Value Measurements
The Company follows FASB ASC Topic 820, Fair Value Measurements. ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted
accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants.
ASC 820 establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the
reporting entity and unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available.
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three
levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the Company for financial instruments measured at fair value on a recurring basis.
The three levels of inputs are as follows:
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our financial instruments include cash and cash
equivalents, restricted cash, short-term financial instruments, short-term loans, accounts receivable, investments, accounts payables and debt. The carrying values of these financial instruments approximate their fair value due to their short
maturities. The carrying amount of our debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to us.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
The Company also has financial instruments classified within the fair value hierarchy, which consists of the following:
The derivatives are evaluated under the hierarchy of ASC 480-10, ASC Paragraph 815-25-1 and ASC Subparagraph 815-10-15-74 addressing embedded derivatives. The fair value of the Level 3 financial instruments was
determined with the assistance of an independent third-party valuation specialist using an Option Pricing Model.
The following table summarize the Company’s fair value measurements by level at December 31, 2019 for the assets measured at fair value on a recurring basis:
The following table summarize the Company’s fair value measurements by level at December 31, 2018 for the assets measured at fair value on a recurring basis:
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consisted of taxes currently due and deferred taxes. Deferred taxes are recognized for the differences between
the basis of assets and liabilities for financial statement and income tax purposes.
The Company follows FASB ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
FASB ASC 740-10-25 provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. The Company must recognize the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based
on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company did not recognize additional liabilities for uncertain tax positions pursuant to FASB ASC 740-10-25 for the year ended December
31, 2019 and 2018.
Contingencies
Accounting guidance requires that the Company record an estimated loss from a loss contingency when information available prior to issuance of the consolidated financial statements indicates that it is probable
that an asset has been impaired or a liability has been incurred at the date of the consolidated financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal matters requires significant
judgment. Many of these legal matters can take years to resolve. Generally, as the time period increases over which the uncertainties are resolved, the likelihood of changes to the estimate of the ultimate outcome increases.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash and trade receivable arising from its normal business activities. The Company deposits its cash in high credit
quality institutions. The Company performs ongoing credit evaluations to its customers and establishes allowances when appropriate.
Cash and cash equivalents are maintained at various financial institutions located in Korea. The Company has never experienced any losses related to these balances.
Advertising
Costs associated with advertising and promotions are expensed as incurred. Advertising expense amounted to $44,698 and $43,158 for the years ended December 31, 2019
and 2018, respectively.
Employee Stock Based Compensation
The Company accounts for its share-based compensation plan in accordance with FASB ASC 718, Stock Compensation, which establishes a fair value method of accounting for
stock-based compensation plans. The Company records stock compensation expense based on the value of the number of shares vesting specified periods over three years.
Stock-based compensation issued to employees and members of our board of directors is measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. The grant date fair
value of a stock-based award is recognized as an expense over the requisite service period of the award on a straight-line basis.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
For purposes of determining the variables used in the calculation of stock-based compensation issued to employees, the Company performs an analysis of current market data and historical data to calculate an estimate of implied volatility, the
expected term of the option and the expected forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black-Scholes option pricing model. Depending upon the number of
stock options granted any fluctuations in these calculations could have a material effect on the results presented in our consolidated statements of operations. In addition, any differences between estimated forfeitures and actual forfeitures
could also have a material impact on our consolidated financial statements.
Non-controlling Interests
Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date.
Government Grants
Government grants are not recognized unless there is reasonable assurance that the Company will comply with the grants’ conditions and that the grants will be received. Government borrowings, which are lower than
the market interest rate, are regarded as government grants. The grant is measured from the difference between the fair values of the government borrowings computed using the market interest rate and the acquisition cost of the grant. Government
grants whose primary condition is that the Company purchase, construct or otherwise acquire long-term assets are deducted in calculating the carrying amount of the asset. The grant is recognized in profit or loss over the life of a depreciable
asset as a reduced depreciation expense.
Government grants which are intended to compensate the Company for expenses incurred are recognized as other income in profit or loss over the periods in which the Company recognizes the related costs as expenses.
There were no amounts of government grants outstanding as of December 31, 2019 and 2018.
National Tax Service in Korea administered Value Added Tax under the Tax Reform Act of 1976 promulgated by the National Assembly. Value added tax is imposed on goods sold in or imported into Korea and on services
provided within Korea. Value added tax in Korea is charged on an aggregated basis at a rate of 10% on the full price collected for the goods sold or for the taxable services provided. Value added tax paid were $374,799 and $466,338 for the years ended
December 31, 2019 and 2018, respectively.
Recent Accounting Pronouncement
Pronouncements Not Yet Effective
In August 2018, the FASB amended “Fair Value Measurements” to modify the disclosure requirements related to fair value. The amendment removes requirements to disclose (1) the
amount of and reasons for transfers between levels 1 and 2 of the fair value hierarchy, (2) our policy related to the timing of transfers between levels, and (3) the valuation processes used in level 3 measurements. It clarifies that, for
investments measured at net asset value, disclosure of liquidation timing is only required if the investee has communicated the timing either to us or publicly. It also clarifies that the narrative disclosure of the effect of changes in level 3
inputs should be based on changes that could occur at the reporting date. The amendment adds a requirement to disclose the range and weighted average of significant unobservable inputs used in level 3 measurements. The guidance is effective for
the Company with the Company’s quarterly filing for the period ended March 31, 2020 and the Company will make the required disclosure changes in that filing. Adoption will not have an impact on the Company’s consolidated results of operations,
consolidated financial position, and cash flows.
In August 2018, the FASB amended “Retirement Plans” to modify the disclosure requirements for defined benefit plans. For the Company, the amendment requires the disclosure of
the weighted average interest crediting rate used for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. It removes the requirement to disclose the
approximate amount of future benefits covered by insurance contracts. The guidance is effective for the Company with the Company’s annual filing for the year ended December 31, 2020 and the Company will make the required disclosure changes in
that filing. Adoption will not have an impact on the Company’s consolidated results of operations, consolidated financial position, and cash flows.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company’s accounting for the service element of a hosting arrangement that is a service
contract is not affected by the proposed amendments and will continue to be expensed as incurred in accordance with existing guidance. This standard does not expand on existing disclosure requirements except to require a description of the
nature of hosting arrangements that are service contracts. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, including adoption in any
interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively or retrospectively. The Company plans to adopt the updated disclosure requirements of ASU No. 2018-15 prospectively
in the first quarter of fiscal 2020, coinciding with the standard’s effective date, and expects the impact from this standard to be immaterial.
In January 2017, the FASB amended “Goodwill” to simplify the subsequent measurement of goodwill. The amended guidance eliminates Step 2 from the goodwill impairment test.
Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill of the reporting unit. The new guidance is effective for the Company on January 1, 2020
and is not expected to have an impact on our consolidated results of operations, consolidated financial position, and cash flows.
In June 2016, the FASB amended “Financial Instruments” to provide financial statement users with more decision-useful information about the expected credit losses on debt
instruments and other commitments to extend credit held by a reporting entity at each reporting date. During November 2018 and April 2019, the FASB made amendments to the new standard that clarified guidance on several matters, including
accrued interest, recoveries, and various codification improvements. The new standard, as amended, replaces the incurred loss impairment methodology in the current standard with a methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information to support credit loss estimates. The new guidance is effective for us on January 1, 2020, and in the first half of 2019, we established an implementation team and
began analyzing the impact on our current policies and procedures to identify potential differences that would result from applying the requirements of the new standard. The implementation team reports findings and progress of the project to
management on a frequent basis. Through this process, we have identified appropriate changes to our processes, systems, and controls to support recognition and disclosure under the new standard. The Company is still evaluating the impact of
the new standard on the Company’s consolidated results of operations, consolidated financial position, and cash flows.
Other recently issued accounting updates are not expected to have a material impact on the Company’s Interim Financial Statements.
Recently Adopted Accounting Pronouncements
In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220) (ASU 2018-02), which amends existing
standards for income statement-reporting comprehensive income to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Tax Cuts and Jobs Act and improve the usefulness
of information reported to financial statements users. ASU 2018-02 will be effective for beginning after December 15, 2018, and early adoption is permitted. The Company adopted ASU
2018-02 effective January 1, 2019; such adoption had no material impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07 “Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 aligns the accounting for share-based
payment awards to employees and non-employees. Under ASU 2018-07 the existing employee guidance will apply to nonemployee share-based transactions, except for specific guidance related to the attribution of compensation cost. ASU 2018-07
should be applied to all new awards granted after the date of adoption. ASU 2018-07 is effective for annual and interim periods beginning after December 15, 2018, and early adoption
is permitted. The Company adopted ASU 2018-07 effective January 1, 2019; such adoption had no material impact on the Company’s consolidated financial statements.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which removed the requirement for an entity to disclose in the interim periods after
adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per share amount. For lessors, the new leasing standard requires leases to be classified as
a sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard and related update was effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2016-02 effective January 1,
2019; such adoption had no material impact on the Company’s financial statements, given that the noncancelable term of the Company’s current lease is less than 12 months.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those
leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company can elect to record a cumulative-effect adjustment as of
the beginning of the year of adoption or apply a modified retrospective transition approach. The Company expects that substantially all of its operating lease commitments will be subject to the new guidance and will be recognized as operating
lease liabilities and right-of-use assets upon adoption. The Company adopted ASU 2016-02 effective January 1, 2019; such adoption had no material impact on the Company’s financial statements, given that the noncancelable term of the Company’s
current lease is less than 12 months.
Property and equipment consist of the following:
Depreciation expense for December 31, 2019 and 2018 were $151,652 and $56,295, respectively.
As noted in Note 2, the government grants received is against the values of assets acquired or the expenses incurred.
The Company had the following investments.
Equity Method
The Company applies the equity method for investments in affiliate, which a privately-held company where quoted market prices are not available, in which it
has the ability to exercise significant influence over operating and financial policies of the affiliate. Significant influence is generally defined as 20% to 50% ownership in the voting stock of an investee. The Company changed PT IONSOFT
account classification from equity method to cost method since third quarter of 2019 since the share of PT IONSOFT has changed from 20% into 0.9% as of August 1, 2019.
Available-for-sale securities
The Company’s investments also include privately-held companies, where quoted market prices are not available, and the cost method, combined with other intrinsic information, is used to assess the fair value of the
investment.
The following table summarize the Company’s investment securities at December 31, 2019 and 2018:
Intangible assets consist of the following:
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
Amortization expense for December 31, 2019 and 2018 were $24,134 and $20,523, respectively.
Future amortization expense of the Company’s intangible assets at December 31, 2019 is expected to be as follows:
As noted in Note 2, the government grants received is against the values of assets acquired or the expenses incurred.
Total long-term debt consisted of the following:
Future minimum payments on debt consists of the following:
The long-term debts contain certain covenants, and the Company was in compliance with the covenants.
The Company has lines of credit with financial institutions for total amount of approximately $3,400,000 that expires in various months in 2020, unless extended. There was no outstanding balance under the credit
lines at December 31, 2018. The lines of credit, bearing various interest rates are guaranteed by the officer of the Company.
The Company has an arrangement with its customers and a financial institution, in which the Company’s customers issue electronic invoices with the Company as the recipient. The Company can use these receivables as
collaterals for loans up to approximately $5,100,000 and $5,400,000 as of December 31, 2019 and 2018, respectively. The Company receives its payments due when the customer fully pays the invoices
to the financial institution. The interest rates vary depending on the Company’s customers’ credit ratings. The Company has no borrowings outstanding as of December 31, 2019 and 2018, respectively. The maturity date of the arrangement varies on
the dates of the original transactions.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
The Company entered into a securities purchase agreement (the “SPA”) with Peak One Opportunity Fund, L.P. (“Peak One”) on August 13, 2018. The financing arrangement between the Company and Peak One stipulates that
Peak One will invest up to $540,000 in the Company through three separate tranches. Each tranche will be funded in exchange for a convertible debt instrument issued at a 10% discount, with a face value of $200,000. On this same date, the first
tranche closed and the Company issued a convertible debt instrument to Peak One for $200,000 at a 10% discount. The convertible debt issued has the following significant terms:
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
The embedded conversion feature was determined to be a derivative that does not require bifurcation pursuant to ASC 815, but was determined to be a beneficial conversion feature that requires recognition within
equity on the commitment date. The beneficial conversion feature is recognized at its intrinsic value on the commitment date, limited to the proceeds allocated to the convertible debt. As such, the Company recorded $89,788 within additional
paid-in-capital on the consolidated balance sheet for the beneficial conversion feature identified. The debt discount arising from recognition of the beneficial conversion feature will be amortized as interest expense over the term of the
convertible debt. As of December 31, 2018, amortization expense of debt discount related to the beneficial conversion feature was not significant.
In connection with the convertible debt issuance, the Company also issued a detachable common stock warrant on August 13, 2018 that allows Peak One to purchase up to 50,000 shares of common stock at an exercise
price of $2.75 per share, subject to adjustments as stated in the warrant agreement. The common stock warrant expires 5 years from the issuance date. The common stock warrant was determined to meet equity classification pursuant to ASC 480 and
ASC 815. As such, the fair value of the common stock warrant is recorded as additional paid-in-capital on the consolidated balance sheet, which was determined to be $89,788, net of issuance costs allocated to the warrant, on the issuance date.
The debt discount arising from recognition of the common stock warrant will be amortized as interest expense over the term of the convertible debt. As of December 31, 2019, amortization expense of debt discount related to the common stock warrant
was not significant.
The Company has the following convertible debt instruments outstanding:
On February 19, 2019, the Company redeemed all the outstanding convertible debt at a 30% premium for a total redemption price of $255,000. The redemption was accounted for as an extinguishment of
debt. Accordingly, the beneficial conversion feature recognized in conjunction with the convertible debt was de-recognized. The Company recorded approximately $216,208 of loss on extinguishment of convertible debt, which reported in the
consolidated statement of income during 3 months period ending March 31, 2019.
Interest expense related to the convertible debt for the years ended December 31, 2019 and 2018 amounted to approximately $8,333 and $23,000 respectively.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
On August 13, 2018 (the “Closing Date”), the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”) with the convertible debenture holder (the “Holder”), whereby, upon the terms and subject
to the conditions thereof, the Holder is committed to purchase shares of the Company’s common stock, par value $0.0001 per share (the “Purchase Shares”), at an aggregate price of up to $10,000,000 (the “Total Commitment Amount”) over the course
of a 24- month term. The significant terms of the Purchase Agreement are given below:
The actual amount of proceeds the Company receives pursuant to each Put Notice (each, the “Put Amount”) is to be determined by the lesser of (i) 88% of the lowest closing bid price of the Company’s Common Stock on
the trading day immediately preceding the respective date of the Put Notice and (ii) 88% of the lowest closing bid price during the Valuation Period (the period of 7 trading days immediately following the clearing date associated with the
applicable Put Notice).
The Put Amount Requested pursuant to any single Put Notice must have an aggregate value of at least $20,000, and cannot exceed the lesser of (i) 250% of the average daily trading value of the common stock in the 10
trading days immediately preceding the Put Notice or (ii) such number of shares of common stock that has an aggregate value of $500,000.
Upon execution of the Purchase Agreement, the Company issued 100,000 shares of common stock with a par value of $0.0001 to the Holder.
The Company adopted the provisions of FASB ASC Topic 480 and Topic 815, to determine the proper classification of the Purchase Agreement. The Company determined the put option meets the definition of a derivative
under ASC 815 but is outside the scope of ASC 480. Under ASC 816-40, the Company determined the derivate does not meet equity classification and accordingly, is classified as an asset on the consolidated balance as a Level 3 financial instrument.
The Company used an independent third-party valuation firm to determine the fair value of the derivative asset using an Option Pricing Model.
Changes to fair value at the end of each reporting period is recorded as other income or expense in the consolidated statements of income. The following table summarizes the changes in the Level 3
financial instrument related to the derivate asset for the equity put option:
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
Royalty
On February 15, 2006, the Company agreed to provide the rights to Ashisuto to sell the products in the Japanese market. Per the agreement, the contract period is automatically extended by 5 years up to 20 years.
Total royalty amounts received for the three-months period were not significant. Total royalty amounts received for the years ended December 31, 2019 and 2018 were approximately $184,000 and
$181,000, respectively.
Operating Leases
The Company leases its office under non-cancelable operating leases that expire on dates through December 2020. The lease is automatically extended upon agreement of both parties. Future minimum rental payments
under the non-cancelable operating leases as of December 31, 2019 are as follows:
Rent expense for all operating leases were $144,126 and $152,686 for the years ended December 31, 2019 and 2018, respectively.
The Company receives loan guarantees from the chief executive officer with regards to its long-term borrowing, and the Company’s restricted cash provided as collateral to the Company’s chief executive officer’s
loans.
The Company calculates earnings per share in accordance with FASB ASC 260, Earnings Per Share, which requires a dual presentation of basic and diluted earnings per share.
Basic earnings per share are computed using the weighted average number of shares outstanding during the fiscal year. Potentially dilutive common shares consist of stock options outstanding (using the treasury method).
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
The following table sets forth the computation of basic and diluted net income per common share:
No non-vested share awards or non-vested share unit awards were antidilutive for the years ended December 31, 2019 and 2018.
Income taxes consist of the following:
Total income tax (benefit) expense consists of the following:
Current income tax expense is based on taxable income for federal and state tax reporting purposes. Deferred income tax expense is provided for certain income and expenses which are recognized in different periods
for tax and financial reporting purposes.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
Deferred income tax assets and liabilities are computed annually for differences between the consolidated financial statements and tax basis of assets and liabilities that will result in taxable or deductible
amount in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the
amount expected to be realized.
The significant components of deferred income tax assets and liabilities are as follows:
The difference between the change in net deferred tax assets and the deferred income tax expenses is mainly due to remeasurement of deferred tax assets and liabilities reflecting currency exchange rates at the
balance sheet dates. The related tax impact was recorded through other comprehensive income.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
In assessing the realization of gross deferred income tax assets, management considers whether it is more likely than not that some portion or all its deferred income tax assets will not be realized. The ultimate
realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements
The effective tax rates for the reporting periods are as follows: